10 Stock Clunkers for 2019 - csresearch.s3.amazonaws.com

10 Stock Clunkers for 2019

10 Stock Clunkers for 2019

By: John Del Vecchio, Forensic Accountant & Editor of Hidden Profits

Rising tides do not lift all boats. Until late 2018, it was easy sailing in the stock market. Since the 2009 lows, it's been almost straight up. For nearly every stock.

But, starting in 2018, something changed. Many individual stocks started to falter even as the indexes hugged their highs. By the time anyone noticed that the market was under pressure, more than 50% of the stocks in the S&P 500 Index were already in bear market territory.

A lot of boats have started to sink.

The thing is, we've experienced one of the longest bull markets. Ever.

When we do have a bear market, it'll be nastier than normal. That's because all the excesses of the last 10 years, like quantitative easing, boosted asset prices to nosebleed levels. Stock valuations hit historical highs. That story won't end well.

Another thing happened along the way. Investors piled into index funds. Those funds bought every stock, good or bad. That also pushed their prices up way too high. It created stocks that everyone owns! So, what happens when investors rush for the exits all at once? Stocks will likely overreact to the downside.

Chances are you own several stocks that may be hazardous to your wealth as we head into 2019, and into the next bear market, whenever that is.

This report highlights a handful of stocks that I think could do real damage to a portfolio in 2019 due to bear market activity and over-ownership.

How did I come up with this list?

Over 10 years ago, I developed my own software that analyzed the financial statements of public companies. It uses many formulas that I developed myself having pored over the financial filings of more than 1,000 public companies.

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It's called Forensic Accounting Stock Trackers (FAST). FAST quickly separates the wheat from the chaff in the market. Just because a company reports $1.00 of earnings per shares doesn't mean it's real.

Accounting rules allow for a lot of leeway that management can use to their advantage. They can make the numbers look better than they really are. Then you, the average investor, get the wool pulled over your eyes. Meanwhile, management gets to reach into the cookie jar and enrich themselves through an inflated stock price.

In the institutional world, big investors pay a lot of money for lists like this. Some firms paid up to $500,000 a year for a list of the top-scoring stocks from one major trading firm I did business with. That's too rich for my own blood, and I developed my own tools. They liked my first book on this topic so much that they used it to sell their software. Today, there's about $800 million managed using some of the FAST formulas I developed.

I like to focus on the stocks that might do damage to a portfolio. I call them "clunkers."

What can you do about these potential clunkers?

If you want to profit from stocks falling apart, you could short them. Shorting a stock means selling it now and then (hopefully) buying it back at a cheaper price. You profit from the difference.

Shorting stocks has been brutal the last 10 years. I should know. I've been doing it professionally for about two decades. Most of my colleagues are out of business. Some are probably in insane asylums from banging their heads against the wall as crappy companies saw their stock prices soar to the moon.

But shorts in a bear market will probably pay off even bigger than the last two crises. That's because the last two bubbles were created by hype in the internet market and real estate. Now, everything is inflated. There's nowhere to hide!

The second thing you could do if you own these stocks is watch them. Closely. Every move. Risk is higher here. So, a whiff of something not right with the company and it's time to bail. You can also tighten stops in order to lock in gains.

Third, you can sell. You can sell now. You can sell later. Sell when it's right for you.

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Finally, you can do nothing. Sometimes the best thing to do is nothing. But, when market valuations are at extremes, market sentiment is way too bullish, and stocks are starting to break down, sitting around spitting into the wind isn't a strategy I like. I don't want to take a 75% loss. Even if it's on paper.

These are the type of losses we're looking at here. Without further ado, here's the list of stocks that worry me for 2019 and beyond.

The Clunkers for 2019

Apple (Nasdaq: AAPL) is the most widely held stock. It's often the biggest component of virtually any portfolio you can own. Especially if you own an exchange-traded fund (ETF). Not only is Apple over-owned, it's finest days may be behind it.

How so? Well, recently, Apple's management told investors that it has decided to stop disclosing iPhone unit sales. According to the company's CFO, Luca Maestri, the "number of units sold in a quarter is not representative of the underlying state of the business."

To put it mildly, that's a ridiculous statement.

Of course iPhone unit sales matter! Analysts and investors burn the midnight oil to try and forecast iPhone sales. It's a key metric in the performance of the company. Unfortunately for Apple, unit sales are starting to look lackluster. What's saved Apple is that the average selling price has been much higher than investors expected. But the gap between Apple's prices and the rest of the industry are large enough to drive a Mack truck through!

How much more can Apple squeeze consumers with minor changes like a better camera?!

That's the question.

If there were a manual on forensic accounting and a huge tipoff that a company is about to come unglued, Rule No. 1 would be that if a company stops reporting important data to investors, look out below. Companies don't stop reporting key data when the numbers look great. Instead they highlight them in the press release!

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IBM (NYSE: IBM) has been one of my favorite punching bags for years. I've shorted the stock numerous times in this bull market. Successfully. I've recommended to newsletter subscribers several times to short the stock in this bull market. Successfully, too.

I don't think the bottom is in. The stock continues to perform poorly. Eventually, it could become irrelevant. IBM is over-owned because it's a major component of the large indexes like the Dow Jones Industrial Average. But maybe not for long...

IBM is like the Titanic. It hit the iceberg a long time ago. The ship is sinking. The orchestra is playing on deck. Clueless investors have been duped by management, who wasted tens of billions of dollars in capital buying back stock and supporting the dividend as the business around it melted like an ice cube.

A huge problem facing IBM is, back in the old days, when large contracts came up for renewal, nearly 100% of the time the customer renewed the deal with IBM. Often at a higher price. Business was sort of on autopilot. There was a saying that buyers never got fired for doing business with IBM.

Times have changed. Competition is fierce. The world is flat. Competitors in India are more agile. Deals don't get renewed like they used to. Pricing is under pressure. Growth is slowing. Cash flow is weakening. The company can't get back the billions of dollars it wasted to engineer its financial statements.

When IBM gets kicked out of the big indexes, there will be lots of sellers. The next bear market will also likely see threats to the company's dividend. It's no longer a widow and orphan stock.

The Big Bank Stocks mostly move in the same direction. It's a highly correlated trade. So, I'm not singling out a particular company, like Lehman Brothers or Bear Stearns, both of which bit the dust in the last crisis.

This time around there isn't an obvious catalyst in my opinion. A dozen years ago, it was obvious that the housing market was overheated and banks were playing games with goofy mortgages. But bank stocks started to head south in 2018 before the rest of the market.

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